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Think you got problems? Cape Verde spent the past decade fighting its way out of poverty to achieve “middle-income” status.

But the escalating euro zone crisis is jeopardizing that accomplishment. The West African island nation’s top trading partners? Portugal and Spain.

Contagion – meaning collateral damage from direct or indirect exposure to the problem – is not just a euro zone headache.

Much of the world is linked through financial markets and trade. The danger is investors run to safe havens, economies shrink, and unemployment rises. The US, China and India have all weighed in on its perils. US states have reason to be concerned about the local impact.[5]

Even tiny countries like Cape Verde, with populations of a half-million can’t escape, as they confront lower demand for exports and less foreign investment.

“Without a solution to the euro zone crisis, the world economy could be swept into a downward spiral of collapsing confidence, weaker growth, and fewer jobs,” International Monetary Fund director Christine Lagarde said Sunday. “This would affect all nations and so we all have a stake in resolving that crisis.”

German Chancellor Angela Merkel said on Monday that Europe is facing its “toughest hour since World War II.”

What’s frustrating for many countries is that they can only watch as euro zone leaders struggle to find a cure.

So what can Europe do to contain the crisis?

Many experts have called for the European Central Bank to assume the role of lender of last resort – just as the US Federal Reserve did during the mortgage meltdown. Prominent leaders — including US President Barack Obama, British Prime Minister David Cameron and Russian Prime Minister Vladimir Putin — have urged the ECB to do this as well. And with good reason.

“The ECB is the only institution in the euro zone that can contain the crisis,” said Dimitrios Malliaropulos, an analyst at Eurobank EFG in Athens. “They have unlimited firepower. If you know the central bank has enough reserves, you don’t go against it because the central bank will break you.”

Buying large amounts of government bonds, especially those of Italy and Spain – much more than the limited buying ECB has done recently — would ease market fears and bring down their borrowing costs, the argument goes.

These days, France is arguing forcefully to unleash the ECB's power. Germany, however, disagrees. Today, the fight spilled out into the public, withe senior officials from both governments issuing contentious statements[6].

Germany, the euro zone's powerhouse[7], contends that deploying the ECB's might is a recipe for higher inflation, and that it removes incentives for bloated governments to reform their economies. Jens Weidman, the president of Germany's powerful Bundesbank, has rejected the idea[8], arguing that such intervention would violate European law, and that only politicians can solve the crisis.

Germany also disapproves of a French plan to treat the euro zone’s new rescue fund – called the European Financial Stability Facility – like a bank, which would allow it to borrow ECB funds.

Michael Schroeder, senior analyst at the Centre for European Economic Research in Mannheim, Germany, said inflation “is a very large negative side effect.” Structurally, Italy and Spain are in much better shape than Greece, he said.

“There are some very strong disturbances in the bond markets, but I don’t see the need for Italy to need any help right now,” he said. "It’s not time to do anything else but to stabilize their own government.”

It’s not just Germans who are reluctant to go on a buying spree, however. The new ECB president, Mario Draghi, said in his introductory press conference on Nov. 3 that it’s the job of governments, not the central bank, to maintain financial stability.

Draghi told governments “first, put your public finance in order and, second, undertake structural reforms” to grow their economies. He said it’s “pointless” to think that interventions like ECB bond-buying could lower sovereign borrowing costs for any “protracted” period of time. He cautioned that any buying is temporary and “limited in its amount.”

It’s not within the jurisdiction of the ECB to become the lender of last resort for governments, he added. “The real answer is actually to count on the countries’ capacity to reform themselves with the right economic policies,” Draghi said.

Last month, euro zone leaders agreed to nearly double the rescue fund to about $1.4 trillion, but even that wouldn’t be enough to bailout Italy, Europe’s third-largest economy.

Greece, Ireland and Portugal have received bailouts but the debt crisis in Greece escalated as EU officials realized that their first rescue package was insufficient. Continued fear of a Greek default then turned to worries about Italy’s ability to service its debts.

Italy’s borrowing costs on Tuesday pushed past the key 7 percent mark — the same level that forced Ireland, Portugal and Greece to seek bailouts. Rates also rose Tuesday on Spanish and French debt.

Anxiety is evident around the world. In New Delhi last week, Indian and Chinese officials met for economic talks that were dominated by the euro crisis.

In a joint statement, the world’s two most populous nations said the global economy is at a “critical phase” because of “uncertainty over the sustainability of sovereign debts in some advanced economies.”

“In emerging markets, where growth is relatively stronger, there are clear signs of a slowing as developments in advanced economies begin to weigh on these economies,” the statement said.

US Federal Reserve Chairman Ben Bernanke said the euro zone crisis is partly responsible for the “frustratingly slow” pace of economic recovery.

“Unfortunately we can’t disassociate ourselves from Europe,” Bernanke said at a Nov. 2 press conference. “The things that are happening there do affect us. That’s an unfortunate fact. I hope very much that Europeans will find a set of solutions that will allow markets to calm down and take off some of the head winds from the US economy.”

Lagarde, the IMF chief, also warned of a “lost decade,” adding: “No country can be immune under the present circumstances, no matter how developed or how emerging or how far away it is.”

While not immune, Latin America appears well positioned. Fitch Ratings said recently that in most Latin American countries, subsidiaries of European banks hold less than 20 percent of assets. Interactions with parent banks “show none of the interdependence” that exposes other emerging markets to contagion risk, the ratings agency said.

Malliaropulos, the Eurobank analyst, said Greece was “just a trigger” for the crisis and that Italy “was an easy victim like Greece was” because of the architecture of the euro zone.

“They have to make up their minds whether they want a fiscal union,” he said.

Merkel hinted at proposed EU changes in a speech Monday to her Christian Democratic Union party. She said there needs to be improvement in “the handling of budgets” in Europe and that those countries may need to “do more” to help themselves.